What the ECB bail-out was NOT

There seems to be a lot of cross-talk about what the ECB bail out was and was not for.

We must be careful not to assume the ECB action was the response to what was being talked about in the news at the time. At the time two things were in the headlines. One was the worry about the value of the euro. Would it collapse? The other was about a cascade of debt default. It was often not made very clear in the media whether the politicians or bankers were talking about Sovereign default and debt, or Bank default and debt.

So let’s be clear – the actions taken were not about ‘saving’ the value of the euro or saving the euro in any other way either. What was done, was precisely what you wold do if you wanted to lower the value of the euro. The ECB’s own documents going back to 03 at least make this clear. It is why Trichet had always said the banks would NOT buy rubbish bonds from bankrupt banks and nations. That is they never would until they were told to.

Suddenly the ECB said, new policy, we now WILL accept as collateral/buy bonds with very low value in exchange for new euros with high value. The result is that the ECB’s vault was swept clean of anything of worth and replaced with all the worthless play money the BANKS were chocking on.

The ECB action DID NOT and WILL NOT encourage stability on the bond holdings of banks. No more than the FED identical action last year did in America. What happened there, is that every major bank that could, immediately tendered everything they could to the FED. They stood in line and the FED opened wide and swallowed every seedy, worthless piece of scrap paper the bankers wanted to feed it.

The same will happen to the ECB. The inevitable result will be that there is less of worth in the ECB’s war chest. This will NOT and never would ‘save’ the EUro. It will weaken it..

What it will do is save the banks – specifically the French (Thus Sarkozy’s little tantrum), and some of Germany’s as well.

Is it a bad thing that the EUro has been weakened? Well lets divide weakening the euro form weakening the ~ECB. A weaker euro was what everybody wanted. Everybody except the Chinese. They want their currency to be the weakest.

It has been plane for a while that whereas in GD1 there were competitive import tariffs, in GD2 we prefer competitive currency devaluation. The difficult trick is to get your currency lower without this starting a fire in you debt costs. It is a difficult trick to manage. So far Euro land is not doing well. All debt servicing costs for many of its more vulnerable nations (Greece, Spain, Portugal, even Italy ) have spiked up over this last weekend.

What the bail out did was put out a raging fire in bank debt but by carrying the burning paper over to the ECB. Sheer genius. Who said politicians have short attention spans and live only in the short term?